An investor bought 400 shares of stock when its price was $40/share. The price o

Question

An investor bought 400 shares of stock when its price was $40/share. The price of the stock is now up to $75/share and the investor decides to hedge his position by purchasing 4 puts (premium = $7.50, exercise price of 75). If, by the expiration date of the puts, the price of the stockfalls to $50/share, the investor would make a net profit of:

a $10,000 b $4,000 c $14,000 d $11,000

Pistol Whip Inc. (PWI) is selling at 95. The 90 calls (with 2 months to expiration) have a premium of 6. If PWI goes to 103, what is your profit assuming you bought and exercised a 90 call. Ignore transaction costs.

a $600 b $500 c $700 d $400

What is the value of a put option with a strike price of $50 when the underlying stock is selling at $45 per share?

a $5 b $0 c $15 d Cannot determine from information given.

Explanation / Answer

Since, exercise price is higher than the market price, investor will exercise the put option and sells and at strike price of $75 per share.

His total profit on 400 shares will be as shown below:

= 400×($75-$7.50-$40)

= $11,000 (Option (d))

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